Solution Manual Fundamentals of Corporate Finance 13th edition by Ross Westerfield Jordan

Solution Manual Fundamentals of Corporate Finance 13th edition by Ross Westerfield Jordan – Updated 2024

Complete Solution Manual With Answers

Sample Chapter Is Below

 

 

Solutions Manual

Fundamentals of Corporate Finance 13th edition

Ross, Westerfield, and Jordan

Prepared by

Brad Jordan

University of Florida

Joe Smolira

Belmont UniversityCHAPTER 1

INTRODUCTION TO CORPORATE

FINANCE

Answers to Concepts Review and Critical Thinking Questions

1. 2. 3. 4. 5. 6. 7. Capital budgeting (deciding whether to expand a manufacturing plant), capital structure (deciding

whether to issue new equity and use the proceeds to retire outstanding debt), and working capital

management (modifying the firm’s credit collection policy with its customers).

Disadvantages: unlimited liability, limited life, difficulty in transferring ownership, difficulty in

raising capital funds. Some advantages: simpler, less regulation, the owners are also the managers,

sometimes personal tax rates are better than corporate tax rates.

The primary disadvantage of the corporate form is the double taxation to shareholders of distributed

earnings and dividends. Some advantages include: limited liability, ease of transferability, ability to

raise capital, and unlimited life.

In response to Sarbanes-Oxley, small firms have elected to go dark because of the costs of compliance.

The costs to comply with Sarbox can be several million dollars, which can be a large percentage of a

small firm’s profits. A major cost of going dark is less access to capital. Since the firm is no longer

publicly traded, it can no longer raise money in the public market. Although the company will still

have access to bank loans and the private equity market, the costs associated with raising funds in

these markets are usually higher than the costs of raising funds in the public market.

The treasurer’s office and the controller’s office are the two primary organizational groups that report

directly to the chief financial officer. The controller’s office handles cost and financial accounting, tax

management, and management information systems, while the treasurer’s office is responsible for cash

and credit management, capital budgeting, and financial planning. Therefore, the study of corporate

finance is concentrated within the treasury group’s functions.

To maximize the current market value (share price) of the equity of the firm (whether it’s publicly

traded or not).

In the corporate form of ownership, the shareholders are the owners of the firm. The shareholders elect

the directors of the corporation, who in turn appoint the firm’s management. This separation of

ownership from control in the corporate form of organization is what causes agency problems to exist.

Management may act in its own or someone else’s best interests, rather than those of the shareholders.

If such events occur, they may contradict the goal of maximizing the share price of the equity of the

firm.

8. A primary market transaction.CHAPTER 1 – 2

9. In auction markets like the NYSE, brokers and agents meet at a physical location (the exchange) to

match buyers and sellers of assets. Dealer markets like NASDAQ consist of dealers operating at

dispersed locales who buy and sell assets themselves, communicating with other dealers either

electronically or literally over-the-counter.

10. Such organizations frequently pursue social or political missions, so many different goals are

conceivable. One goal that is often cited is revenue minimization; that is, provide whatever goods and

services are offered at the lowest possible cost to society. A better approach might be to observe that

even a not-for-profit business has equity. Thus, one answer is that the appropriate goal is to maximize

the value of the equity.

11. Presumably, the current stock value reflects the risk, timing, and magnitude of all future cash flows,

both short-term and long-term. If this is correct, then the statement is false.

12. An argument can be made either way. At the one extreme, we could argue that in a market economy,

all of these things are priced. There is thus an optimal level of, for example, ethical and/or illegal

behavior, and the framework of stock valuation explicitly includes these. At the other extreme, we

could argue that these are noneconomic phenomena and are best handled through the political process.

A classic (and highly relevant) thought question that illustrates this debate goes something like this:

“A firm has estimated that the cost of improving the safety of one of its products is $30 million.

However, the firm believes that improving the safety of the product will only save $20 million in

product liability claims. What should the firm do?”

13. The goal will be the same, but the best course of action toward that goal may be different because of

differing social, political, and economic institutions.

14. The goal of management should be to maximize the share price for the current shareholders. If

management believes that it can improve the profitability of the firm so that the share price will exceed

$35, then they should fight the offer from the outside company. If management believes that this bidder

or other unidentified bidders will actually pay more than $35 per share to acquire the company, then

they should still fight the offer. However, if the current management cannot increase the value of the

firm beyond the bid price, and no other higher bids come in, then management is not acting in the

interests of the shareholders by fighting the offer. Since current managers often lose their jobs when

the corporation is acquired, poorly monitored managers have an incentive to fight corporate takeovers

in situations such as this.

15. We would expect agency problems to be less severe in countries with a relatively small percentage of

individual ownership. Fewer individual owners should reduce the number of diverse opinions

concerning corporate goals. The high percentage of institutional ownership might lead to a higher

degree of agreement between owners and managers on decisions concerning risky projects. In addition,

institutions may be better able to implement effective monitoring mechanisms on managers than can

individual owners, based on the institutions’ deeper resources and experiences with their own

management. The increase in institutional ownership of stock in the United States and the growing

activism of these large shareholder groups may lead to a reduction in agency problems for U.S.

corporations and a more efficient market for corporate control.16. CHAPTER 1 – 3

How much is too much? Who is worth more, Mark Parker or LeBron James? The simplest answer is

that there is a market for executives just as there is for all types of labor. Executive compensation is

the price that clears the market. The same is true for athletes and performers. Having said that, one

aspect of executive compensation deserves comment. A primary reason executive compensation has

grown so dramatically is that companies have increasingly moved to stock-based compensation. Such

movement is obviously consistent with the attempt to better align stockholder and management

interests. In recent years, stock prices have soared, so management has cleaned up. It is sometimes

argued that much of this reward is due to rising stock prices in general, not managerial performance.

Perhaps in the future, executive compensation will be designed to reward only differential

performance, that is, stock price increases in excess of general market increases.CHAPTER 1 – 4

CHAPTER 2

FINANCIAL STATEMENTS, TAXES,

AND CASH FLOW

Answers to Concepts Review and Critical Thinking Questions

1. 2. 3. 4. 5. 6. 7. 8. Liquidity measures how quickly and easily an asset can be converted to cash without

significant loss in value. It’s desirable for firms to have high liquidity so that they have a

large factor of safety in meeting short-term creditor demands. However, since liquidity also

has an opportunity cost associated with it—namely that higher returns can generally be found

by investing the cash into productive assets—low liquidity levels are also desirable to the

firm. It’s up to the firm’s financial management staff to find a reasonable compromise

between these opposing needs.

The recognition and matching principles in financial accounting call for revenues, and the

costs associated with producing those revenues, to be “booked” when the revenue process is

essentially complete, not necessarily when the cash is collected or bills are paid. Note that

this way is not necessarily correct; it’s the way accountants have chosen to do it.

Historical costs can be objectively and precisely measured whereas market values can be

difficult to estimate, and different analysts would come up with different numbers. Thus,

there is a trade-off between relevance (market values) and objectivity (book values).

Depreciation is a noncash deduction that reflects adjustments made in asset book values in

accordance with the matching principle in financial accounting. Interest expense is a cash

outlay, but it’s a financing cost, not an operating cost.

Market values can never be negative. Imagine a share of stock selling for –$20. This would

mean that if you placed an order for 100 shares, you would get the stock along with a check

for $2,000. How many shares do you want to buy? More generally, because of corporate and

individual bankruptcy laws, net worth for a person or a corporation cannot be negative,

implying that liabilities cannot exceed assets in market value.

For a successful company that is rapidly expanding, for example, capital outlays will be

large, possibly leading to negative cash flow from assets. In general, what matters is whether

the money is spent wisely, not whether cash flow from assets is positive or negative.

It’s probably not a good sign for an established company, but it would be fairly ordinary for

a start-up, so it depends.

For example, if a company were to become more efficient in inventory management, the

amount of inventory needed would decline. The same might be true if it becomes better at

collecting its receivables. In general, anything that leads to a decline in ending NWC relative

to beginning would have this effect. Negative net capital spending would mean that more

long-lived assets were liquidated than purchased.CHAPTER 1 – 5

9. If a company raises more money from selling stock than it pays in dividends in a particular

period, its cash flow to stockholders will be negative. If a company borrows more than it

pays in interest, its cash flow to creditors will be negative.

10. The adjustments discussed were purely accounting changes; they had no cash flow or market

value consequences unless the new accounting information caused stockholders to revalue

the derivatives.

11. Enterprise value is the theoretical takeover price. In the event of a takeover, an acquirer

would have to take on the company’s debt but would pocket its cash. Enterprise value differs

significantly from simple market capitalization in several ways, and it may be a more

accurate representation of a firm’s value. In a takeover, the value of a firm’s debt would need

to be paid by the buyer. Thus, enterprise value provides a much more accurate takeover

valuation because it includes debt in its value calculation.

12. In general, it appears that investors prefer companies that have a steady earnings stream. If

true, this encourages companies to manage earnings. Under GAAP, there are numerous

choices for the way a company reports its financial statements. Although not the reason for

the choices under GAAP, one outcome is the ability of a company to manage earnings, which

is not an ethical decision. Even though earnings and cash flow are often related, earnings

management should have little effect on cash flow (except for tax implications). If the market

is “fooled” and prefers steady earnings, shareholder wealth can be increased, at least

temporarily. However, given the questionable ethics of this practice, the company (and

shareholders) will lose value if the practice is discovered.

Solutions to Questions and Problems

NOTE: All end of chapter problems were solved using a spreadsheet. Many problems require

multiple steps. Due to space and readability constraints, when these intermediate steps are

included in this solutions manual, rounding may appear to have occurred. However, the final

answer for each problem is found without rounding during any step in the problem.

Basic

1. To find owners’ equity, we must construct a balance sheet as follows:

Balance Sheet

TA $33,500 TL & OE $33,500

CA $ 5,400 CL $ 4,100

NFA 28,100 LTD 10,600

OE ??

We know that total liabilities and owners’ equity (TL & OE) must equal total assets of

$33,500. We also know that TL & OE is equal to current liabilities plus long-term debt

plus owners’ equity, so owners’ equity is:

Owners’ equity = $33,500 – 10,600 – 4,100

Owners’ equity = $18,800

And net working capital (NWC) is:CHAPTER 1 – 6

NWC = CA – CL

NWC = $5,400 – 4,100

NWC = $1,300

2. The income statement for the company is:

Income Statement

Sales $742,000

Costs 316,000

Depreciation 39,000

EBIT $387,000

Interest 34,000

EBT $353,000

Taxes (21%) 74,130

Net income $278,870

3. One equation for net income is:

Net income = Dividends + Addition to retained earnings

Rearranging, we get:

Addition to retained earnings = Net income – Dividends = $278,870 – 125,000 =

$153,870

4. EPS = Net income/Shares = $278,870/75,000 = $3.72 per share

DPS = Dividends/Shares = $125,000/75,000 = $1.67 per share

5. 85,525)

Taxes = .10($9,875) + .12($40,125 – 9,875) + .22($85,525 – 40,125) + .24($163,300 –

+ .32($189,000 – 163,300)

Taxes = $41,495.50

The average tax rate is the total tax paid divided by taxable income, so:

Average tax rate = $41,495.50/$189,000

Average tax rate = .2196, or 21.96%

The marginal tax rate is the tax rate on the next $1 of earnings, so the marginal tax rate is

32 percent.

6. To calculate OCF, we first need the income statement:

Income Statement

Sales $49,800

Costs 23,700

Depreciation 2,300

EBIT $23,800

Interest 1,800

Taxable income $22,000

Taxes (22%) 4,840

Net income $17,160

OCF = EBIT + Depreciation – TaxesCHAPTER 1 – 7

OCF = $23,800 + 2,300 – 4,840

OCF = $21,260

7. Net capital spending = NFAend – NFAbeg + Depreciation

Net capital spending = $3,100,000 – 2,300,000 + 327,000

Net capital spending = $1,127,000

8. Change in NWC = NWCend – NWCbeg

Change in NWC = (CAend – CLend) – (CAbeg – CLbeg)

Change in NWC = ($5,970 – 3,240) – ($5,320 – 2,510)

Change in NWC = $2,730 – 2,810

Change in NWC = –$80

9. Cash flow to creditors = Interest paid – Net new borrowing

Cash flow to creditors = Interest paid – (LTDend – LTDbeg)

Cash flow to creditors = $305,000 – ($2,660,000 – 2,250,000)

Cash flow to creditors = –$105,000

10. Cash flow to stockholders = Dividends paid – Net new equity

Cash flow to stockholders = Dividends paid – [(Commonend + APISend) – (Commonbeg +

APISbeg)]

Cash flow to stockholders = $654,000 – [($965,000 + 5,040,000) – ($780,000 +

4,780,000)]

Cash flow to stockholders = $209,000

Note, APIS is the additional paid-in surplus.

11. Cash flow from assets = Cash flow to creditors + Cash flow to stockholders

= –$105,000 + 209,000 = $104,000

Cash flow from assets = $104,000 = OCF – Change in NWC – Net capital spending

= $104,000 = OCF – (–$55,000) – 1,500,000

Operating cash flow = $104,000 – 55,000 + 1,500,000

Operating cash flow = $1,549,000

Intermediate

12. To find the book value of current assets, we use: NWC = CA – CL. Rearranging to solve

for current assets, we get:

CA = NWC + CL

CA = $275,000 + 945,000

CA = $1,220,000

The market value of current assets and fixed assets is given, so:

Book value CA = $1,220,000 Market value NWC = $1,250,000

Book value NFA = 3,500,000 Market value NFA = 5,400,000

Book value assets = $4,720,000 Total = $6,650,000CHAPTER 1 – 8

13. To find the OCF, we first calculate net income.

Income Statement

Sales $336,000

Costs 194,700

Other expenses 9,800

Depreciation 20,600

EBIT $110,900

Interest 14,200

Taxable income $96,700

Taxes 21,275

Net income $ 75,425

Dividends $21,450

Additions to RE $53,975

a. OCF = EBIT + Depreciation – Taxes

OCF = $110,900 + 20,600 – 21,275

OCF = $110,225

b. CFC = Interest – Net new LTD

CFC = $14,200 – (–5,400)

CFC = $19,600

Note that the net new long-term debt is negative because the company repaid part of

its long-

term debt.

c. CFS = Dividends – Net new equity

CFS = $21,450 – 7,100

CFS = $14,350

d. We know that CFA = CFC + CFS, so:

CFA = $19,600 + 14,350

CFA = $33,950

CFA is also equal to OCF – Net capital spending – Change in NWC. We already

know OCF. Net capital spending is equal to:

Net capital spending = Increase in NFA + Depreciation

Net capital spending = $53,200 + 20,600

Net capital spending = $73,800

Now we can use:

CFA = OCF – Net capital spending – Change in NWC

$33,950 = $110,225 – 73,800 – Change in NWC

Change in NWC = $2,475

This means that the company increased its NWC by $2,475.

The solution to this question works the income statement backwards. Starting at the

14. bottom:CHAPTER 1 – 9

15. Net income = Dividends + Addition to retained earnings = $2,370 + 6,800 = $9,170

Now, looking at the income statement:

EBT – EBT × Tax rate = Net income

Recognize that EBT × Tax rate is the calculation for taxes. Solving this for EBT yields:

EBT = NI/(1 – Tax rate) = $9,170/(1 –

.22) = $11,756

Now you can calculate:

EBIT = EBT + Interest = $11,756 + 5,300 = $17,056

The last step is to use:

EBIT = Sales – Costs – Depreciation

$17,056 = $76,800 – 36,900 – Depreciation

Depreciation = $22,844

The balance sheet for the company looks like this:

Balance Sheet

Cash $ 165,000 Accounts payable $ 273,000

Accounts receivable 149,000 Notes payable 201,500

Inventory 372,000 Current liabilities $ 474,500

Current assets $ 686,000 Long-term debt 1,079,000

Total

liabilities $1,553,500 Tangible net fixed assets $2,093,000

Intangible net fixed assets 858,000 Common stock ??

Accumulated ret. earnings 1,778,000

Total assets $3,637,000 Total liab. & owners’

equity $3,637,000

Total liabilities and owners’ equity is:

TL & OE = CL + LTD + Common stock + Retained earnings

Solving this equation for common stock gives us:

Common stock = $3,637,000 – 1,778,000 – 1,553,500

Common stock = $305,500

16. The market value of shareholders’ equity cannot be negative. A negative market value in

this case would imply that the company would pay you to own the stock. The market

value of shareholders’ equity can be stated as: Shareholders’ equity = Max[(TA – TL),

0]. So, if TA are $11,600, equity is equal to $1,300, and if TA are $9,400, equity is equal

to $0. We should note here that the book value of shareholders’ equity can be negative.CHAPTER 1 – 10

17. Income Statement

18. Sales $865,000

COGS 535,000

A&S expenses 125,000

Depreciation 170,000

EBIT $35,000

Interest 90,000

Taxable income –$55,000

Taxes (25%) 0

a. Net income –$55,000

b. OCF = EBIT + Depreciation – Taxes

OCF = $35,000 + 170,000 – 0

OCF = $205,000

c. Net income was negative because of the tax deductibility of depreciation and interest

expense. However, the actual cash flow from operations was positive because

depreciation is a non-cash expense and interest is a financing expense, not an

operating expense.

A firm can still pay out dividends if net income is negative; it just has to be sure there is

sufficient cash flow to make the dividend payments.

Change in NWC = Net capital spending = Net new equity = 0. (Given)

Cash flow from assets = OCF – Change in NWC – Net capital spending

Cash flow from assets = $205,000 – 0 – 0 = $205,000

Cash flow to stockholders = Dividends – Net new equity = $128,000 – 0 = $128,000

Cash flow to creditors = Cash flow from assets – Cash flow to stockholders

Cash flow to creditors = $205,000 – 128,000 = $77,000

Cash flow to creditors = Interest – Net new LTD

Net new LTD = Interest – Cash flow to creditors = $90,000 – 77,000 = $13,000

19. a.

Income Statement

Sales $38,072

Cost of goods sold 27,168

Depreciation 6,759

EBIT $ 4,145

Interest 3,050

Taxable income $ 1,095

Taxes (22%) 241

Net income $ 854

b. OCF = EBIT + Depreciation – Taxes

= $4,145 + 6,759 – 241 = $10,663

c. Change in NWC = NWCend – NWCbeg

= (CAend – CLend) – (CAbeg – CLbeg)

= ($9,904 – 5,261) – ($8,025 – 4,511)

= $1,129

Net capital spending = NFAend – NFAbeg + Depreciation

= $28,053 – 22,790 + 6,759 = $12,022CHAPTER 1 – 11

CFA = OCF – Change in NWC – Net capital spending

= $10,663 – 1,129 – 12,022 = –$2,488

The cash flow from assets can be positive or negative, since it represents whether the

firm raised funds or distributed funds on a net basis. In this problem, even though net

income and OCF are positive, the firm invested heavily in both fixed assets and net

working capital; it had to raise a net $2,488 in funds from its stockholders and

creditors to make these investments.

d. Cash flow to creditors = Interest – Net new LTD = $3,050 – 0 = $3,050

Cash flow to stockholders = Cash flow from assets – Cash flow to creditors

= –$2,488 – 3,050 = –$5,538

We can also calculate the cash flow to stockholders as:

Cash flow to stockholders = Dividends – Net new equity

Solving for net new equity, we get:

Net new equity = $2,170 – (–5,538) = $7,708

The firm had positive earnings in an accounting sense (NI > 0) and had positive cash

flow from operations. The firm invested $1,129 in new net working capital and

$12,022 in new fixed assets. The firm had to raise $2,488 from its stakeholders to

support this new investment. It accomplished this by raising $7,708 in the form of

new equity. After paying out $2,170 of this in the form of dividends to shareholders

and $3,050 in the form of interest to creditors, $2,488 was left to meet the firm’s cash

flow needs for investment.

20. a. Total assets2020 = $1,327 + 5,470 = $6,797

Total liabilities2020 = $530 + 2,891 = $3,421

Owners’ equity2020 = $6,797 – 3,421 = $3,376

Total assets2021 Total liabilities2021 Owners’ equity2021 = $1,438 + 6,587 = $8,025

= $595 + 3,075 = $3,670

= $8,025 – 3,670 = $4,355

b. NWC2020 NWC2021 Change in NWC = CA2020 – CL2020 = $1,327 – 530 = $797

= CA2021 – CL2021 = $1,438 – 595 = $843

= NWC2021 – NWC2020 = $843 – 797 = $46

c. We can calculate net capital spending as:

Net capital spending Net capital spending = Net fixed assets2021 – Net fixed assets2020 + Depreciation

= $6,587 – 5,470 + 1,499 = $2,616

So, the company had a net capital spending cash flow of $2,616. We also know that

net capital spending is:

Net capital spending $2,616 Fixed assets sold = Fixed assets bought – Fixed assets sold

= $2,740 – Fixed assets sold

= $2,740 – 2,616 = $124CHAPTER 1 – 12

To calculate the cash flow from assets, we must first calculate the operating cash

flow. The income statement is:

Income Statement

Sales $16,831

Costs 7,849

Depreciation expense 1,499

EBIT $ 7,483

Interest expense 427

EBT $ 7,056

Taxes (21%) 1,482

Net income $ 5,574

So, the operating cash flow is:

OCF = EBIT + Depreciation – Taxes = $7,483 + 1,499 – 1,482 = $7,500

And the cash flow from assets is:

Cash flow from assets = OCF – Change in NWC – Net capital spending

= $7,500 – 46 – 2,616 = $4,838

d. Net new borrowing Cash flow to creditors = LTD2021 – LTD2020 = $3,075 – 2,891 = $184

= Interest – Net new LTD = $427 – 184 = $243

Net new borrowing Debt retired = $184 = Debt issued – Debt retired

= $554 – 184 = $370

21. To construct the cash flow identity, we will begin with cash flow from assets. Cash flow

from assets is:

Cash flow from assets = OCF – Change in NWC – Net capital spending

So, the operating cash flow is:

OCF = EBIT + Depreciation – Taxes

OCF = $81,741 + 72,489 – 14,028

OCF = $140,202

Next, we will calculate the change in net working capital, which is:

Change in NWC = NWCend – NWCbeg

Change in NWC = (CAend – CLend) – (CAbeg – CLbeg)

Change in NWC = ($77,250 – 35,834) – ($61,240 – 31,870)

Change in NWC = $12,046

Now, we can calculate the capital spending. The capital spending is:

Net capital spending = NFAend – NFAbeg + Depreciation

Net capital spending = $539,679 – 457,454 + 72,489

Net capital spending = $154,714

Now, we have the cash flow from assets, which is:CHAPTER 1 – 13

Cash flow from assets = OCF – Change in NWC – Net capital spending

Cash flow from assets = $140,202 – 12,046 – 154,714

Cash flow from assets = –$26,558

The company’s assets generated an outflow of $26,558. The cash flow from operations was

$140,202, and the company spent $12,046 on net working capital and $154,714 on fixed

assets.

The cash flow to creditors is:

Cash flow to creditors = Interest paid – New long-term debt

Cash flow to creditors = Interest paid – (Long-term debtend – Long-term debtbeg)

Cash flow to creditors = $25,630 – ($201,900 – 181,000)

Cash flow to creditors = $4,730

The cash flow to stockholders is a little trickier in this problem. First, we need to calculate

the new equity sold. The equity balance increased during the year. The only way to increase

the equity balance is through retained earnings or selling equity. To calculate the new equity

sold, we can use the following equation:

New equity = Ending equity – Beginning equity – Addition to retained earnings

New equity = $379,195 – 305,824 – 27,883

New equity = $45,488

What happened was the equity account increased by $73,371. Of this increase, $27,883 came

from addition to retained earnings, so the remainder must have been the sale of new equity.

Now we can calculate the cash flow to stockholders as:

Cash flow to stockholders = Dividends paid – Net new equity

Cash flow to stockholders = $14,200 – 45,488

Cash flow to stockholders = –$31,288

The company paid $4,730 to creditors and raised $31,288 from stockholders.

Finally, the cash flow identity is:

Cash flow from assets = Cash flow to creditors + Cash flow to stockholders

–$26,558 = $4,730 + –$31,288

The cash flow identity balances, which is what we expect.22. 23.

24. CHAPTER 1 – 14

Challenge

Net capital spending = NFAend – NFAbeg + Depreciation

= (NFAend – NFAbeg) + (Depreciation + ADbeg) – ADbeg

= (NFAend – NFAbeg)+ ADend – ADbeg

= (NFAend + ADend) – (NFAbeg + ADbeg)

= FAend – FAbeg

Balance sheet as of Dec. 31, 2020

Cash $11,279 Accounts payable $8,150

Accounts receivable 14,934 Notes payable 2,176

Inventory 26,551 Current liabilities $10,326

Current assets $52,764

Total assets $147,365 Total liab. & equity $147,365

Long-term debt $37,778

Net fixed assets $94,601 Owners’ equity $99,261

Balance sheet as of Dec. 31, 2021

Cash $12,021 Accounts payable $8,632

Accounts receivable 17,529 Notes payable 2,133

Inventory 28,421 Current liabilities $10,765

Current assets $57,971

Total assets $158,864 Total liab. & equity $158,864

2020 Income Statement Net capital spending Long-term debt $45,798

Net fixed assets $100,893 Owners’ equity $102,301

2021 Income Statement

Sales $21,514.00 Sales $24,047.00

COGS 7,397.00 COGS 8,750.00

Other expenses 1,759.00 Other expenses 1,531.00

Depreciation 3,089.00 Depreciation 3,229.00

EBIT $9,269.00 EBIT $10,537.00

Interest 1,443.00 Interest 1,723.00

EBT $7,826.00 EBT $8,814.00

Taxes (21%) 1,643.46 Taxes (21%) 1,850.94

Net income $6,182.54 Net income $6,963.06

Dividends $2,573.00 Dividends $3,008.00

Additions to RE 3,609.54 Additions to RE 3,955.06

OCF = EBIT + Depreciation – Taxes = $10,537 + 3,229 – 1,850.94 = $11,915.06

Change in NWC = NWCend – NWCbeg = (CA – CL)end – (CA – CL)beg

= ($57,971 – 10,765) – ($52,764 – 10,326)

= $4,768

= NFAend – NFAbeg + Depreciation

= $100,893 – 94,601 + 3,229 = $9,521CHAPTER 1 – 15

Cash flow from assets = OCF – Change in NWC – Net capital spending

= $11,915.06 – 4,768 – 9,521 = –$2,373.94

Cash flow to creditors = Interest – Net new LTD

Net new LTD = LTDend – LTDbeg

Cash flow to creditors = $1,723 – ($45,798 – 37,778) = –$6,297

Net new equity = Common stockend – Common stockbeg

Common stock + Retained earnings = Total owners’ equity

Net new equity = (OE – RE)end – (OE – RE)beg

= OEend – OEbeg + REbeg – REend

REend = REbeg + Additions to RE2021

 Net new equity RE2021)

= OEend – OEbeg + REbeg – (REbeg + Additions to

Net new equity = OEend – OEbeg – Additions to RE2021

= $102,301 – 99,261 – 3,955.06 = –$915.06

CFS CFS = Dividends – Net new equity

= $3,008 – (–915.06) = $3,923.06

As a check, cash flow from assets is –$2,373.94.

CFA CFA = Cash flow to creditors + Cash flow to stockholders

= –$6,297 + 3,923.06 = –$2,373.94